Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress the Fed should get a stronger hand in supervising investment banks to help shield the broader economy from problems like the ones that forced the emergency rescue of investment bank Bear Stearns.

WASHINGTON
(Reuters) - U.S. policy-makers said on Thursday they were doing
everything possible to restore calm to financial markets but told
lawmakers a longer-term regulatory overhaul was vital to prevent crises
in the future.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry
Paulson told Congress the Fed should get a stronger hand in supervising
investment banks to help shield the broader economy from problems like
the ones that forced the emergency rescue of investment bank Bear
Stearns.

"The Bear Stearns episode and market turmoil more generally have
placed in stark relief the outdated nature of our financial regulatory
system, and has convinced me that we must move much more quickly to
update our regulatory structure and improve both market oversight and
market discipline," Paulson told Congress.

"We should consider how to most appropriately give the Federal
Reserve the authority to access necessary information from complex
financial institutions ... and the tools to intervene to mitigate
systemic risk in advance of a crisis," he said.

Bernanke, in testimony before the same House Financial Services
hearing, said authorities are working within their existing authority
to settle markets roiled by a credit crunch.

He also recommended stricter oversight of large investment banks and
primary dealers that trade securities directly with the Fed in light of
the disruptions that have battered the U.S. economy.

"Cooperation between the Fed and the (Securities and Exchange
Commission) is taking place within the existing statutory framework
with the objective of addressing the near-term situation," Bernanke
said in comments that echoed a speech he gave on Tuesday.

"In the longer term, however, legislation may be needed to provide a
more robust framework for the prudential supervision of investment
banks and other large securities dealers," he said.

ELECTIONS A HURDLE

Both policy-makers agreed that, with presidential elections on the
horizon, it was unlikely that regulatory reforms could be pushed
through this year but vowed to continue looking for solutions to
restore market stability.

Paulson said regulators need emergency authority to step in to limit temporary disruptions to financial markets.

"These authorities should be flexible, and -- to reinforce market
discipline -- the trigger for invoking such authority should be very
high, such as a bankruptcy filing," Paulson said.

"Any potential commitment of government support should be an
extraordinary event that requires the engagement of the Treasury
Department and contains sufficient criteria to prevent costs to the
taxpayer to the greatest extent possible," he added.

Paulson also said that Fannie Mae and Freddie Mac -- the nation's
top two providers of housing finance, which have come under tough
scrutiny amid the subprime mortgage lending crisis -- play a vital role
and should continue to do so. The stock prices of the two
government-sponsored mortgage finance enterprises have been pummeled in
recent days -- and were again on Thursday -- because of speculation
they face financial difficulties, and could even be in need of a
government bailout.

"Their regulator has made clear that they are adequately capitalized," Paulson said.

Separately, the presumptive Republican nominee for president, Sen. John McCain, said the government could not allow Fannie Mae and Freddie Mac to fail in a crisis.

EFFORTS TO REGAIN FINANCIAL SYSTEM'S STABILITY

Bernanke said market turbulence continues and that government
officials are focused on helping the financial system regain stability.

"The financial turmoil is ongoing, and our efforts today are
concentrated on helping the financial system return to more normal
functioning," he said.

Paulson, in discussing regulatory reforms and the need to overhaul
the financial regulatory system, argued that it was vital to maintain
market discipline as a guiding force.

"Regulation alone cannot eliminate all future bouts of instability,"
Paulson said. He added that market participants should not count on
getting lending from the Fed or any other government support easily.

What is your company size?

What is your job title?

What is your job function?

Have the latest technology news and resources emailed to you everyday.

By submitting your information, you agree that baselinemag.com may send you Baselinemag offers via email, phone and text message, as well as email offers about other products and services that Baselinemag believes may be of interest to you. Baselinemag will process your information in accordance with the Quinstreet Privacy Policy.